It all started on June 24th-the stock market’s reaction to the UK leaving the EU. The Dow Jones Industrial Average dropped from just over 18,000 to barely above 17,400 in one session. Britain’s exit–Brexit–had surprised almost everyone and markets don’t like surprises or uncertainty. With an over 500 point drop in one day could this be the beginning of a major market downturn? Of course it might be, because markets move based on technical analysis AND emotions of investors, both professionals and rank and file. With all of the emotion surrounding the Brexit vote, there is bound to be a market reaction.
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The next two days resulted in more of the same. Many of the pundits were urging us to run for cover and secure our assets. Some analysts were acknowledging what makes the most sense–the storm will be much greater in the UK than in the USA. I EVEN HEARD SOME SAY THIS WILL BE A POSITIVE FOR THE AMERICAN ECONOMY. So which is it? A huge negative or a noticeable positive?
What do we know
How about we look at what has happened over the last 40-50 or even 70 years? Pick any lengthy time period you want and you will find equities outperform bonds by about 3.5-4% per year. Historically stocks have earned about 10%/year, and yet we always worry that the future is bleak. Will Brexit be worse than the 2000-2001 tech bubble or the 2008 real estate debacle? I think not. Certainly not in the US. And haven’t we survived those significant downturns, albeit some of us better than others? So, yes this too shall pass.
What more do we know?
There were winners and losers in the early days after Brexit. Some sold before or during the drop and thus did not lose or lose as much as they might have. Some had cash available and bought after day 1 or 2 getting a “bargain.” In the markets there are winners and losers daily and we hear the results almost 24/7. What about those who just sit out that daily decision making and adjust say, quarterly? On the 23rd the Dow was at 18011.07. After the 2 day drop it has regained to 17694.68 as of the 30th and 17949.37 by the 5th of July. We see movement like that frequently.